Rutgers Director on Complexities of U.S. Investment in Cuba

Rutgers Director Talks Cuba

Kevin Riordan, the Executive Director of the Center for Real Estate at the Rutgers Business School recently surveyed the potential—and pitfalls—of American real estate investment in Cuba.

Riordan moderated a Royal Institute of Chartered Surveyors (“RICS”) panel entitled “Destination Havana,” which explored “how the changing economic, political and social landscape will impact the country’s developing real estate and infrastructure.”

“With Raul Castro assuming the presidency and the commencement of the Cuban Thaw in December 2014, there are signs that the state wants to embrace some economic liberalization. Unsurprisingly, this means tourism and real estate.”

Cuba’s newfound willingness to embrace development is often at odds with the country’s Communist culture and government. For instance, while Cubans enjoy free housing, among other amenities, Riordan explains, “free housing means that no one takes responsibility for maintenance, a problem that looms larger when the effects of sub-tropical weather on buildings are considered.”

One of the major draws for foreign development is Old Havana’s Spanish Colonial architecture, which Riordan believes “a developer with a keen interest on historical restoration and redevelopment would be hard-pressed to curb his/her enthusiasm.” However, “the state’s oversight and its dedication to adhering to the state’s priorities must be considered with your return hurdle.”

Riordan explains, “There’s still a lack of large substantive projects under construction because of how business is conducted on the island.” Riordan breaks down a typical Cuban development arrangement:

“Assuming your project moves forward, you enter into a joint 51 percent/49 percent venture with the state. The 51 percent stake is the state and their contribution is basically providing the approvals. The 49 percent owner provides all of the capital, which cannot be financed. In addition a land lease between the state and the JV is established for a nominal rent per annum. The JV is structured for a term of 25 years with an option for an additional 25 years. However, the option is held by the state and this is where doing business gets tricky.”

Riordan sums up the tension between the state, its people, and the developers with a quote from journalist David Muir: “Cubans are – they want to hold onto their culture, their heritage, but they also want to embrace this opportunity, perhaps, for new economic freedoms.”

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